Round 4 of the NAFTA renegotiation discussions concluded last month in Washington, D.C. NAFTA member representatives expressed measured optimism in the progress reached in discussions thus far, while also acknowledging the significant work remaining to secure a final agreement on a new NAFTA framework. Continuing their discussions, NAFTA member representatives will reconvene to resume talks as part of Round 5 on November 17-21 in Mexico City, Mexico. However, because the conclusion of Round 4, and the beginning of Round 5, signal the halfway marker of the discussion timeline, it creates an opportunity to survey the progress made, as well as, the challenges that remain in the NAFTA renegotiation process.

The NAFTA renegotiation is designed as an ongoing conversation over the course of seven rounds stationed at alternating locations within each member country. The first three rounds saw “significant progress” toward restructuring the NAFTA’s policy on customs and trade facilitation, telecommunications, regulatory practices, and digital trade. In addition, NAFTA negotiators reached an agreement on updates in the treatment of small and medium-sized enterprises, including cooperative activities, information sharing, and the establishment of a NAFTA Trilateral SME Dialogue. In conjunction with these broad outlines of consensus, after the fourth round of talks on October 17th, NAFTA negotiators released a joint statement signaling the adoption of a new framework on competition policy, with agreements to strengthen procedural fairness, as well as a joint commitment to more robust enforcement of NAFTA member law.

While Rounds 1-4 have yielded notable progress on updates to the areas outlined above, negotiators acknowledge that significant obstacles remain. Among the agenda items NAFTA negotiators still must address in the concluding three rounds are: strengthening labor standards across the NAFTA member countries, proposed adjustments to loosen government procurement rules, and reforms to the NAFTA trade in agricultural products. In addition, there remain several unresolved issues of special importance to all three NAFTA members, as well as domestic interests within the U.S. The discussions among member countries around these issues have been especially challenging through the first four rounds. These issues involve the restructuring of the rules of origin for automobiles and textiles, and the elimination of the existing dispute resolution process under Chapter 19.

While Mexico and Canada have expressed opposition to each of these latter reforms, both proposals to amend the rules of origin framework have also drawn additional resistance from domestic interests within the U.S. With respect to automobiles, the team of American negotiators formally presented their plan to reform the rules of origin during Round 4 in October. Currently, NAFTA rules of origin do not require any specific percentage of U.S. domestic content in automobile production. Further, the NAFTA sets the required Regional Value Content (“RVC”) (from Canada, Mexico or the U.S.) needed to qualify for NAFTA preference at 62.5%.

However, under the American proposal, only vehicles that have an 85% NAFTA RVC along with a 50% U.S. based domestic content value would qualify for the 0% NAFTA preferential duty rate. Predictably, the American auto industry argues this would result in their forgoing of NAFTA altogether and choosing instead to pay the higher 2.5 percent tariff to import materials from non-NAFTA countries.

The second U.S. proposal eliciting opposition from American industry seeks to amend the rules of origin for textiles. Specifically, U.S. negotiators want to eliminate the “tariff preference levels” from NAFTA. Under the current system, a limited quantity of non-NAFTA originating yarns and fabrics can be counted as originating inputs for tariff calculation purposes. The elimination of this provision benefits U.S. textile manufacturers who compete against these exempted foreign yarns and fabrics. However, because this change to the textile rules of origin scheme would hurt American retailers and the U.S. apparel industry, its adoption also faces significant resistance internally from a different collection of interests.

The final major policy roadblock generating opposition from both Canada and Mexico are American efforts to eliminate NAFTA’s dispute resolution mechanism under Chapter 19 of the existing NAFTA. In place of the dispute settlement process provided for within Chapter 19, American negotiators have offered an alternative, non-binding resolution system that would permit contestants to disregard panel decisions if those decisions were considered “clearly erroneous” by the parties themselves.

Because these American proposals were not initially accepted by Mexico or Canada, discussion of alternative paths forward will resume at subsequent rounds in November. Given the difficulty in resolving these lingering issues, NAFTA members have shifted their timeline back with a new target deadline for reaching a final agreement now set for the end of the first quarter of 2018. However, even if NAFTA members reach an agreement on a modernization of the NAFTA at the end of the seven rounds in early 2018, this new version will still need ratification by Congress in an up or down vote. Companies with a significant commercial stake in the NAFTA should continue to monitor each round of negotiations for new developments and consult their trade counsel for a complete assessment of the potential impact of how the NAFTA renegotiation could affect their supply chains.